Introduction

4 factors underlying China’s technological rise

China became the second richest country in the world in 2011. The commodity price boom alongside with China’s export agenda of poor value-added products, high scale of production and cheap labor costs were the main factor of competitiveness that took the country to this position.

The past few years, however, have been decisive in putting China on a new important path: technology and innovation. Today, 90% of computers and 75% of mobile phones in the world are produced in the Asian country. Issued by Chinese Premier Li Keqiang and his cabinet in May 2015, the Made in China 2025 initiative marked the governmental push for this last ongoing transformation. But like any government-led policy, it only began to take shape because it was also embraced by the Chinese productive sector and international investors and companies.

The four factors that moves China

LABS has selected four factors that are making China a technological power, strong enough to scare the United States and trigger a trade war starring Donald Trump:

Factor 1

After Mao’s death, open economy and strong manufactured industry

The economic opening of China took place from 1976 when Mao Tse-Tung died and Deng Xiaoping returned to the Communist Party command. 2019, in fact, marks 70 years of Communist Party rule in the country. In China, it is the Communist Party general secretary who usually gains the status of the country’s leader because of his strong influence on the Chinese economy and culture.

Xiaoping was the supreme leader of China from 1978 to 1992. During this period, he introduced several economic measures, or as he would like to say “the second revolution” that really transformed China. In 1979, Xiaoping was the first Chinese leader to visit the United States. It was his idea to create special economic zones, where foreign companies could set up as long as they had Chinese organizations as partners.

According to The Economist, Asia first emerged as a manufacturing power in the 1960s, when Japan began exporting electronics and consumer goods, followed by Taiwan and South Korea. Two decades after, Japanese firms were building plants across South-East Asia. But it was China’s opening up that made the region the factory of the world.

In the 1990s the country produced less than 3% of global manufacturing output in terms of value; in the 2000s this share tripled and surpassed that of the United States; and today, it is almost one-third of the world’s global manufacturing output by value.

Factor 2

High-tech capability gap and a new labor market

Both private and public investment in education in China are high. On one side, the Chinese government spends 20% of its budget on the area. On the other side, household expenses with education reach levels equivalent to 50% of the government’s education budget. At the same time, China has the highest number of students studyning overseas, and they’re more likely to return to their country than students from other nationalities.

The growing specialization and automation of Chinese industrial production, however, is causing a profound change in the country’s labor market. Positions are becoming more specialized and salaries higher. As a result, lower value-added factories are moving to other parts of Southeast Asia looking for even lower costs.

Different from what one might think, productivity analysis indicates a low return for China’s public and private huge R&D investment. China’s labor productivity growth remains the highest around the world, but it has been slowing down in the recent decade. This is not an isolated fact. According to the 2019’s Global Competitiveness Report of the World Economic Forum, the world productivity growth started slowing down well before the financial crisis and plummeted afterward.

Still, China ranks 28th of the overall report. From all the criteria, the country’s best results are in ICT adoption (18th position), innovation capability (24th) and infrastructure (36th). On the other hand, the country’s performance when it comes to the functioning of the labour market is severely undermined by insufficient workers’ rights protection, conflictual industrial relations, low participation of women, among other factors. In these criteria, China is in the 72nd position.

Factor 3

Made in China 2025 initiative

China has commoditized the low and medium-tech industry computers, smartphones, and even high-speed rails and now wants to do the same thing with high-tech (clean energy systems, autonomous cars, robotics, and so on). That means the advanced technologies used today in rich countries will be available to developing countries in a process driven by China. This was already an important goal of the Belt and Road Initiative, launched in 2013 by Xi Jinping, and only got stronger with the Made in China 2025 plan, launched in 2015.

Although four years have passed after its launch, the program was no longer mentioned in official speeches, China has not stopped pursuing its main objectives. The plan targets a 70% self-sufficiency in critical components across a range of high-tech industries, among other goals, using government subsidies to help companies reduce their dependence on foreign technology and imports have become a political flashpoint for the US-China trade war.

Although the domestic market is still an asset to the country, China has already begun to prepare for more unfavorable growth scenarios in which investment and foreign consumption will play important roles.

Factor 4

Focus on R&D and a huge network of suppliers

From the second half of the 2000s, China has been ahead of the United States in Research and Development (R&D) by many measures: R&D spending; R&D spending as a share of GDP; number of academic research papers.

The improved Chinese version of Quantitative Easing (QE)–a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy–have been generating massive funds to be channeled toward R&D. According to The Economist, though, unlike other countries, such as Japan, that have turned to unconventional tools for general easing when all else has failed, China uses its lending for targeted purposes, hoping to avoid splashing cash all over an economy when debt levels are already too high. That’s what specialized analysts and journalists say even though it is impossible to know exactly how much money does this instrument leveraged throughout the years and its exact influence on China’s economic growth.

Besides this massive effort towards R&D, and thanks to China’s manufacturing revolution, the supply chains of several industries, consisting of thousands of tech components suppliers, are concentrated in the country. And if technological innovation is really about creating a new product or service through the combination of tech components, well, China is the place for it.

Still, not all of the factors shown here guarantee that China will, in fact, become “the” global leader in technology and innovation. That’s the evaluation of Yanfei Li, an economist and researcher at the Economic Research Institute for ASEAN and East Asia, who wrote an article for The Diplomat about China’s tech rise.